Carter Bank & Trust Announces Second Quarter 2020 Financial Results

MARTINSVILLE, VA / ACCESSWIRE / July 23, 2020 / Carter Bank & Trust (the "Bank") CARE today announced net income of $4.5 million, or $0.17 diluted earnings per share, for the second quarter of 2020, as compared to net income of $4.4 million, or $0.17 diluted earnings per share, in the first quarter of 2020 and net income of $7.8 million, or $0.30 diluted earnings per share, for the second quarter of 2019. Pre-tax pre-provision earnings¹ were $9.4 million, $9.5 million and $9.7 million for the quarters ended June 30, 2020, March 31, 2020 and June 30, 2019, respectively.

For the six months ended June 30, 2020, net income was $8.9 million, or $0.34 diluted earnings per share, as compared to net income of $15.4 million, or $0.58 diluted earnings per share in the first six months of 2019. Pre-tax pre-provision earnings were $18.9 million and $19.3 million for the six months ended June 30, 2020 and 2019, respectively.

Second Quarter 2020 Financial Highlights

• Net interest income declined $1.0 million, or 3.7%, to $26.3 million as compared to the linked quarter primarily due to balance sheet repricing driven by the impact of the lower interest rate environment, offset by a 17 basis point decrease in funding costs compared to the first quarter of 2020, and decreased $1.7 million, or 6.1%, over the same quarter in 2019;
• Net interest margin, on a fully taxable equivalent basis, declined 18 basis points to 2.79% over the linked quarter and decreased 23 basis points over the same quarter last year;
• Portfolio loan growth of $17.4 million, or 2.4% on an annualized basis, as compared to the linked quarter, and growth of $91.9 million, or 3.2%, as compared to June 30, 2019;
• Total deposits increased $133.7 million, or 15.4% on an annualized basis, to $3.6 billion as of June 30, 2020 as compared to the linked quarter. Noninterest-bearing and interest bearing demand deposits, money market accounts and savings, increased by $195.6 million, or 12.3%, as compared to linked quarter;
• The provision for loan losses totaled $5.5 million for the quarter ended June 30, 2020, $4.8 million for the quarter ending March 31, 2020 and $1.4 million for the same quarter of 2019. Included is the impact of a reserve build of $3.4 million, or $(0.10) per share, and $2.6 million, or $(0.08) per share, driven by economic and market conditions as a result of COVID-19 for the second and first quarters of 2020, respectively;
• Nonperforming loans declined $1.5 million, or 3.6% as compared to December 31, 2019 and decreased $4.3 million, or 9.6%, from June 30, 2019. Nonperforming loans as a percentage of total portfolio loans were 1.37%, 1.38% and 1.57% as of June 30, 2020, March 31, 2020 and June 30, 2019, respectively.

"Our financial results this quarter continue to reflect the impact from the unusual economic and social environment we are experiencing as a result of COVID-19." stated Litz H. Van Dyke, Chief Executive Officer. "As a community bank, we are committed to support the communities in which we do business, including direct financial assistance to local relief programs, and providing financial flexibility to our individual and business customers to help them deal with the challenges from this crisis. We have also taken unprecedented measures to assure we provide a safe environment for both our employees and customers as we continue to be operational while trying to minimize the disruption to our Bank."

Van Dyke continued, "I would like to commend our many associates whose resilience and commitment during these very difficult circumstances has been nothing short of amazing. We continue to open accounts, make loans, and process transactions. We experienced loan growth as well as growth in lower cost deposits for the quarter. While there still remains tremendous uncertainty as to the longer term impact that this crisis will have on our markets and customers, we are confident that our strong capital and liquidity position, combined with our robust technology capabilities and risk management infrastructure, we are well prepared to navigate these uncertain times."

Operating Highlights

Net interest income decreased $2.3 million, or 4.2%, to $53.5 million during the first six months of 2020 as compared to the same period of 2019. The net interest margin, on a fully taxable equivalent basis, decreased 18 basis points to 2.88% over the past twelve months. The decreases in short-term interest rates had a negative impact on both net interest income and net interest margin, but are offset by a lower cost of funds. The yield on interest-earning assets decreased 35 basis points, offset by an 18 basis point decline in funding costs as compared to the same period of 2019.

The provision for loan losses totaled $10.3 million for the six month period ended June 30, 2020 and $3.0 million for the same period of 2019. The Bank was subject to the adoption of the Current Expected Credit Losses ("CECL") accounting method under Financial Accounting Standards Board ("FASB") Accounting Standards Update 2016-03 and related amendments, Financial Instruments - Credit Losses (Topic 326). However, the Bank elected under the Coronavirus, Aid, Relief, and Economic Security ("CARES") Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. Included in the provision expense for the six months ended June 30, 2020 is the impact of a reserve build of $6.0 million, or $(0.18) per share, driven by economic and market conditions as a result of COVID-19. This represents a 243% increase in the provision expense as compared to the same period of 2019. The Bank adjusted qualitative risk factors under its incurred loss model for economic conditions, changes in payment deferral procedures, expected changes in collateral values due to reduced cash flows and external factors such as government actions. Management believes the uncertainty regarding customers' ability to repay loans could be adversely impacted by the COVID-19 pandemic given higher unemployment rates, requests for payment deferrals, temporary business shutdowns and reduced consumer and business spending.

At June 30, 2020, nonperforming loans were $40.6 million, a decrease of $1.5 million, or 3.6% as compared to December 31, 2019. Net charge-offs were $1.6 million in the first six months of 2020 as compared to $2.2 million in the same period of 2019. As a percentage of total portfolio loans, on an annualized basis, net charge-offs were 0.11% and 0.15% for the periods ending June 30, 2020 and 2019, respectively. Nonperforming loans as a percentage of total portfolio loans were 1.37%, 1.38% and 1.57% as of June 30, 2020, March 31, 2020 and June 30, 2019, respectively.

Noninterest income at June 30, 2020, excluding net securities gains, increased $2.2 million, or 30.4%, for the six months ending June 30, 2020 as compared to the same period of 2019. The increase was primarily due to $1.5 million of commercial loan swap fee income due to the high demand for this product in the current rate environment, $1.0 million of higher insurance commissions, related to the adoption of ASU 2014-09, Topic 606 by our provider, $0.2 million of higher debit card interchange fees, which were offset by lower service charges on deposit accounts of $0.3 million due to COVID-19 fee waivers. Other Real Estate Owned ("OREO") income declined $0.3 million due to the sale of several large commercial properties over the last 12 months that generated income. Securities gains of $3.5 million and $0.9 million were realized during the first six months of 2020 and 2019, respectively, to take advantage of market opportunities and reposition and diversify holdings in the securities portfolio.

Total noninterest expense increased $2.9 million, or 6.4%, to $47.6 million for the six months ending June 30, 2020 as compared to the same period of 2019. The increase was primarily driven by salaries and employee benefits and occupancy expenses. The increase of $1.2 million in salaries and benefits were primarily attributable to a $0.8 million increase of normal merit increases and a $0.4 million decrease in salary deferrals on new loan originations in the first six months of 2020. There have not been any permanent or temporary reductions in employees as a result of COVID-19. The $1.0 million increase in occupancy expense is a result of higher depreciation for software and equipment for ancillary products and services. The $0.5 million increase in advertising is related to our deposit acquisition strategy. The $0.4 million increase in the unfunded loan commitment reserve was due to several new commitments approved during the first quarter of 2020 and increased commitments on existing lines of credit. Offsetting these increases were decreases of $0.5 million in debit card expenses and data processing.

Financial Condition

Total assets were $4.2 billion at June 30, 2020 and $4.0 billion at December 31, 2019. Total portfolio loans increased $72.6 million, or 5.0% on an annualized basis, to $3.0 billion as of June 30, 2020 as compared to December 31, 2019. Nonperforming loans decreased $1.5 million to $40.6 million, or 3.6% as of June 30, 2020 as compared to $42.1 million at December 31, 2019. OREO decreased $1.1 million at June 30, 2020 as compared to December 31, 2019. Closed retail bank offices carrying values declined $0.5 million from December 31, 2019 and have a remaining book value of $2.5 million at June 30, 2020.

Federal Reserve Bank excess reserves increased $96.0 million at June 30, 2020 as compared to December 31, 2019 due to maintaining higher liquidity levels as a result of COVID-19.

The securities portfolio increased $6.4 million and is currently 18.0% of total assets at June 30, 2020 as compared to 18.5% of total assets at December 31, 2019. The increase is a result of active balance sheet management. We have further diversified the securities portfolio as to bond types, maturities and interest rate structures.

Total deposits increased $102.5 million to $3.6 billion as of June 30, 2020 as compared to December 31, 2019. Core deposits, including noninterest-bearing and interest-bearing demand deposits, money market accounts and savings, increased by $237.1 million, or 15.4%, as compared to December 31, 2019. Offsetting these increases was the intentional runoff of $134.6 million of higher cost certificates of deposits. Noninterest-bearing deposits comprised 18.4% and 15.8% of total deposits at June 30, 2020 and December 31, 2019, respectively.

The allowance for loan losses was 1.60%, 1.46% and 1.34% of total portfolio loans as of June 30, 2020, March 31, 2020 and December 31, 2019, respectively. General reserves as a percentage of total portfolio loans were 1.33%, 1.22% and 1.13% at June 30, 2020, March 31, 2020 and December 31, 2019, respectively. Included in the allowance is a reserve build of $6.0 million, or $(0.18) per share, driven by economic and market conditions as a result of COVID-19. The allowance for loan losses was 116.8% of nonperforming loans as of June 30, 2020 as compared to 92.0% of nonperforming loans as of December 31, 2019. In the view of management, the allowance for loan losses is adequate to absorb probable losses inherent in the loan portfolio. For further information regarding the Bank's decision to defer CECL under Section 4014 of the CARES Act, as well as further detail on the increase in provision during the first six months of 2020, please see the discussion above under Provision for Loan Losses.

The Bank is providing deferrals to customers under Section 4013 of the CARES Act and regulatory interagency statements on loan modifications. These deferrals typically provide deferrals of both principal and interest for up to 180 days. At the end of the deferral period, for term loans, payments will be applied to accrued interest first and will resume principal payments once accrued interest is current. Deferred principal will be due at maturity. For interest only loans, such as lines of credit, deferred interest will be due at maturity. As of June 30, 2020, we have had 958 commercial loans opt for deferrals with an aggregate principal balance of $1.2 billion. Approximately $462.5 million of these modifications were in the hospitality industry comprised of deferrals on 85 loans. The average deferment period for these customers has been 3.9 months. The request for loan deferrals has generally stabilized at June 30, 2020. We have participated in the Paycheck Protection Program ("PPP") passed by Congress. As of June 30, 2020, we had 970 PPP loans approved totaling $55.8 million. These PPP loans generated $1.5 million in fees which will be recognized in income when the loan is forgiven or over the remaining life of the loan.

The Bank remains well capitalized. The Bank's Tier 1 Capital ratio decreased to 13.32% as of June 30, 2020 as compared to 13.58% as of December 31, 2019. The Bank's leverage ratio was 10.30% at June 30, 2020 as compared to 10.33% as of December 31, 2019. The Bank's Total Risk-Based Capital ratio was 14.57% at June 30, 2020 as compared to 14.83% at December 31, 2019.

Total capital of $489.1 million at June 30, 2020, reflects an increase of $15.9 million as compared to December 31, 2019. The increase in equity during the first six months of 2020 is due to net income of $8.9 million and a $10.2 million increase in other comprehensive income due to changes in fair value of investment securities. These increases were offset by the $3.7 million special dividend paid in March of 2020. The remaining difference of $0.5 million is related to restricted stock activity during the first six months.

At June 30, 2020, funding sources accessible to the Bank include borrowing availability at the Federal Home Loan Bank ("FHLB"), equal to 25% of the Bank's assets approximating $1.0 billion, subject to the amount of eligible collateral pledged, federal funds unsecured lines with six other correspondent financial institutions in the amount of $115.0 million and access to the institutional CD market through brokered CDs and QwickRate. In addition to the above resources, the Bank also has $624.5 million of unpledged available-for-sale investment securities as an additional source of liquidity.

Based on continued market volatility, consensus forecasts for a prolonged low interest rate environment, and the drop in price of the Banks's common stock during the quarter, the Bank is currently analyzing the value of goodwill related to its prior acquisitions. Based on our preliminary analysis, we do not believe that our goodwill is impaired. Any potential goodwill impairment could be material to reported earnings, but would be a non-cash charge and have no effect on the Bank's cash balances, liquidity or tangible equity. In addition, because goodwill and other intangible assets are not included in the calculation of regulatory capital, the Bank's well-capitalized regulatory capital ratios would not be affected by this potential non-cash expense. The Bank anticipates the analysis will be completed prior to filing the Quarterly Report on Form 10-Q with the Federal Deposit Insurance Corporation in August 2020.

About Carter Bank & Trust

Headquartered in Martinsville, VA, Carter Bank & Trust is a state-chartered community bank in Virginia and trades on the Nasdaq Global Select Market under the symbol CARE. The Bank has $4.2 billion in assets and 99 branches in Virginia and North Carolina. For more information visit www.CBTCares.com.

Important Note Regarding Non-GAAP Financial Measures

Statements included in this press release include non-GAAP financial measures and should be read along with the accompanying tables in our definitions and reconciliations of GAAP to non-GAAP financial measures. This press release and the accompanying tables discuss financial measures, such as adjusted noninterest expense, adjusted efficiency ratio, and net interest income on a fully taxable equivalent basis, which are all non-GAAP measures. We believe that such non-GAAP measures are useful because they enhance the ability of investors and management to evaluate and compare the Bank's operating results from period to period in a meaningful manner. Non-GAAP measures should not be considered as an alternative to any measure of performance as promulgated under GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Investors should consider the Bank's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Bank. Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Bank's results or financial condition as reported under GAAP.

Important Note Regarding Forward-Looking Statements

This information contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting Carter Bank & Trust and its future business and operations, and specifically including information related to the pending appraisal of collateral for one impaired loan relationship and potential impacts on the Bank's financial results. Forward looking statements are typically identified by words or phrases such as "will likely result," "expect," "anticipate," "estimate," "forecast," "project," "intend," " believe," "assume," "strategy," "trend," "plan," "outlook," "outcome," "continue," "remain," "potential," "opportunity," "believe," "comfortable," "current," "position," "maintain," "sustain," "seek," "achieve" and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to: credit losses; cyber-security concerns; rapid technological developments and changes; the Bank's liquidity and capital positions; the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the current COVID-19 pandemic), and of governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Bank's borrowers to satisfy their obligations to the Bank, on the value of collateral securing loans, on the demand for the Bank's loans or its other products and services, on incidents of cyberattack and fraud, on the Bank's liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Bank's business operations and on financial markets and economic growth; sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve; a change in spreads on interest-earning assets and interest-bearing liabilities; regulatory supervision and oversight; legislation affecting the financial services industry as a whole, and Carter Bank & Trust, in particular; the outcome of pending and future litigation and governmental proceedings; increasing price and product/service competition; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; managing our internal growth and acquisitions; the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or more costly than anticipated; containing costs and expenses; reliance on significant customer relationships; general economic or business conditions; deterioration of the housing market and reduced demand for mortgages; deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge to net income; re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses. Many of these factors, as well as other factors, are described in our filings with the FDIC. Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.

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